United States Dollar Index turns positive ahead of US PPI data
- The US Dollar Index recovers early losses and turns positive to near 99.93 with the US PPI data in focus.
- Investors expect the US PPI data to have grown at a faster pace.
- Markets also await the US CPI data for August, releasing on Friday.
The US Dollar (USD) claws back its early losses and turns positive ahead of the United States (US) Producer Price Index (PPI) data for August, which will be published at 12:30 GMT.
In European trade, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.15% higher at around 99.93.
Financial markets will closely monitor the US PPI data to get fresh cues regarding the Federal Reserve’s (Fed) interest rate decision next week.
The US headline PPI is expected to have grown at a faster pace of 5.3% Year-on-Year (YoY) against 4.7% in July. The core PPI – which excludes volatile food and energy items – is also seen higher, arriving at 4.6% YoY from the previous reading of 4.2%.
Hot US PPI figures could prompt fears of high inflation expectations, a scenario that could boost hawkish Fed prospects.
This week, investors will also focus on the US Consumer Price Index (CPI) data for August, which is scheduled for Friday.
According to TD Securities, the upcoming August CPI report should show that underlying price pressures remain contained, with the bank expecting that "underlying inflation stayed under control, with core likely rising 0.19% m/m (2.3% y/y)." Strategists there highlight that "the services segment should be the main driver, while core goods prices likely acted as a drag by posting a modest m/m drop." In contrast, they anticipate that "headline CPI will likely be a stronger 0.37% m/m (3.4% y/y) due to rising energy prices and a slight pickup in food inflation."
US Dollar Index Technical Analysis
In the daily chart, the Dollar Index Spot trades at 98.91, keeping a bearish near-term tone as it holds beneath the 20-day Exponential Moving Average (EMA) at 99.27 and the 61.8% Fibonacci retracement at 99.20.
The Relative Strength Index (RSI) at 40.7 sits below the neutral 50 line, hinting that downside pressure remains in place even as the latest pullback shows some moderation.
On the topside, immediate resistance is seen at the 61.8% retracement near 99.20, closely followed by the 20-day EMA at 99.27, with further barriers at the 50% retracement around 99.70 and then 100.19 and 100.80 from the 38.2% and 23.6% retracements, respectively. On the downside, initial support emerges at the 78.6% retracement around 98.50, ahead of a more substantive floor at the 100% retracement level near 97.61, where buyers could attempt to stabilize the index.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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